When exchange traded options first came into popular existence in the 1970s, it is possible that the founders of the options industry neither fully realized just how useful and prevalent option trading would ultimately become, nor some of the changes that would occur in the ensuing decades. As such they set up a somewhat archaic and limiting method of designating option symbols for trading purposes. An initiative by the Options Clearing Corporation (OCC) has set the stage for the implementation of a more intuitive and far more flexible method for designating option symbols. The intention of the OCC is for this new method to be fully in place by May of 2010.
Option Symbols - The


Old Way


In the "old days," each stock option was designated using a three- to five-character symbol. The first, second and third characters were the underlying "root symbol" for the options on a particular stock. The next character used a single letter to denote whether the option was a call or a put and the expiration month. The last character in an option symbol indicated the strike price and was also denoted using a letter code. (For an in depth explanation of the old system, see What do all of the letters in a stock option ticker symbol mean?)

A Stock Symbol's Alter Ego
The underlying stock symbol was used as the root symbol for the options on that stock whenever possible for stocks listed on the Big Board. Nasdaq stocks that had options traded on them were given a separate three letter option root symbol designation. For example, IBM – which trades on the New York Stock Exchange – has a stock symbol of IBM and likewise an option root symbol of IBM. Microsoft on the other hand, trades on the Nasdaq. Microsoft has a stock symbol of MSFT, but was given an option root symbol of MSQ. This method was somewhat non-intuitive as the options on some popular stocks used their stock symbol as the option root symbols while others required the creation of some arbitrarily designated option root symbol.


The Month of L
As if that were not confusing enough, call options had their expiration months designated using the letters "A" through "L." The letter "A" represented January and the letter "L" stood in for December. In a similar fashion, put options had their expiration months designated using the letters "M" (January) through "X" (December).


That'll Be C Dollars, Please
Finally, to round out the puzzle, option strike prices were designated using a letter code also. The letter "A" denoted a strike price of 5, "B" for 10, "C" for 15 and so on through "T" for the 100 strike. When strike prices were offered at price levels such as 7.5, 12.5, 17.5, 22.5, et cetera, the exchange would denote "non-standard" strikes using letters other than those from "U" through "Z."


The fact that the strike price designations used a letter code to cover strike prices from 5 to 100 suggests that the system was outdated. Once a stock exceeded $100 a share (or 200, or 300 and so on), another "root symbol" had to be added for the stock in question to be used to designate the next $100 worth of strike prices. Once LEAP options came into existence it was possible for some high priced stocks to have 7 to 12 root option symbols.

As a result, using this method the Yahoo April 20 call has an option symbol of YHQDD. YHQ is the option root symbol for Yahoo options with strike prices from $5 to $100. The first D represents the month code for April calls, and the second D represent the strike price of $20. This was not a terribly intuitive approach.

Overdue Changes
And while the options industry continued using this system for a very long time, the introduction and proliferation of such products as LEAP option, index options, yield-based options, short-dated options, flex options and foreign currency options, finally pushed things to the point that the Options Clearing Corporation felt compelled to launch the Option Symbology Initiative, a process designed to revamp the method used to structure option symbols in order to create a more intuitive and standard method. That changeover began in November of 2009, moved to the next phase in February of 2010 and is scheduled to be fully implemented by May 2010. (Most option strategies that protect against particular risks will be completed by using more than one option. To learn more, please read Offset Risk With Options, Futures And Hedge Funds.)


Option Symbols - The New Way
The new method for designating stock option symbols is much more intuitive and a great deal more flexible than the old method. The new longhand symbols themselves still appear to be somewhat arcane, at least until you consider the information that is being conveyed. So let's take a look at the new method. The basic parts of the new option symbols are:


Root Symbol + Expiration Year(yy) + Expiration Month(mm) + Expiration Day(dd) + Call/Put Indicator (C or P) + Strike Price Dollars + Strike Price Fraction of Dollars (which can include decimals)
Let's start at the end and display a "new format" option symbol. We can then break out each part of the symbol and highlight its meaning. After the changeover to the new format is fully implemented the Google September 2010 530 strike price call will have the following symbol:

GOOG100917C00530000

Root Symbols
Ultimately all stock options will use the stock ticker symbol for the underlying stock itself as the root symbol for the option. While this change will be transparent to the majority of traders, it represents a massive and long overdue simplification in the system. Consider that at times, and including LEAP options, a stock trading in the $500 range could have 12 or more option root symbols. Moving forward, all Google options will simply use the same root symbol as the stock itself – GOOG. So the first four characters for all Google options will be the letters GOOG (GOOG100917C00530000).


The Expiration Year
After the root symbol will come the year designation for the option. This will be done using a two-digit value. So all options that expire in 2010 will appear as 10, all options that expire in 2011 will appear as 11, and so forth. So the next two characters for all Google options moving forward will be the year designation (GOOG100917C00530000).


The Expiration Month and Date
Rather than simply designating the expiration month, the new option symbols will spell out the actual expiration date. While most stock options expire on the third Friday of the month, some index options expire a day earlier and some stocks and indexes now trade quarterly or monthly options that expire on the last trading day of the indicated period. Therefore, spelling out the expiration date long hand clearly delineates between the different types of options.


So the next four characters for all Google options moving forward will be the actual option expiration date of September 17th (GOOG100917C00530000).

Call or Put
Under the old symbol method, the symbol itself did not specifically tell you if it was a call or a put option. The only difference was that calls were assigned one set of letters to designate strike prices and put options another set of letters. Unless you were versed in which letters designated calls and which designated puts, there was no simply way to tell.


So the next character for all Google options moving forward will be either a "C" or a "P" designating the option as a call or a put (GOOG100917C00530000).

Strike Price Dollars
The next part of the option symbol is used to designate the round dollar portion of the option's strike price. A five-character field is set aside for this. So an option with a strike price of $20 would read 00020, an option with a strike price of $22 would read 000022 and an option with a strike price of $500.00 would read 00500 in this field.


So for the Google 530 call the five characters after the letter "C" would designate the dollar portion of the strike price (GOOG100917C00530000).

Strike Price Fractions of Dollars
The last part of the option symbol is used to designate the fractions of a dollar included in the strike price. Three characters are set aside for this field. So an option with a strike price of 22.50, this field would read 500. Other cases may involve instances where a stock split has occurred and option strike prices have been split accordingly. For example, let's assume that a stock had an option trading on it with a strike price of 50, and that the stock split 3 for 1. The strike price of 50 would be divided by 3 and would from that point forward be the 16.667 strike. Within the new symbology, this would be designated in the last three characters as 667.


For the Google $530 call the last three characters would simply be all zeros indicating that there is no fraction of dollars in the strike price (GOOG100917C00530000).

Conclusion
The changeover to the new symbology will ultimately simplify the process of identifying specific option symbols. Consider the differences between the old and new symbols shown below for the Yahoo April 2010 20 strike price call and put options:


Option Old Symbol New Symbol
Yahoo April 2010 Call YHQDD YHOO100416C00020000
Yahoo April 2010 Put YHQPD YHOO100416P00020000
While the entries under new symbology are quite a bit longer, a person with just a little knowledge of options would have a much greater chance of figuring out exactly what each symbol represents then he or she would looking at the old letter symbol designations. (For a review of option pricing strategies, check out Understanding Option Pricing and Using the Black-Scholes Model.)

If you're new to options, check out our Options Basics Tutorial.



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